Isaac Hill wrote:He mentioned municipal bonds, but not in much detail, as I'd buy them directly instead of through the bank.
Municipals are harder than most people think.
Its rare that you can participate in a direct auction. I've heard people do so, but that's not how it will work from most brokerages. Most municipal bonds are sold to big-banks and then divied out to "smaller" investors who can "only" afford $10,000 at a time. As such, expect markups in the ~1% region from most brokerages, and a bid-ask spread of as high as 5% if you plan on actually selling those things down the road.
Basically, these "fees" are never talked about. Its implicit when buying a municipal bond. Some bonds may take literally months
before they're bought or sold, so the brokerages who provide inventory really do deserve some degree of compensation for the risk that they take. However, a bit of research on CUSIPs and the previous prices of the bonds can go a long way. (Try to stick to popular bonds which have lots of activity: if someone else bought the bond in the past week, you can be more confident that the price is fair)
However, there are many benefits. You can buy local or at the state level. Many (not all... but many) are Federal-tax free, and if you buy Municipals from your local state, they're often State-tax free. However, the prices on the tax-free bonds are bad... there are taxed bonds which are usually a better deal if you're not paying the top tier 39.6% tax rate.
Of course, run the math with your specific tax-bracket, maybe the tax-free bonds are better. But don't discount taxed municipals. If you're getting 30% better coupon on taxed municipals but are only in the 25% tax bracket, then you should go taxed. Again, most of the tax-free stuff is for the highest 39.6% tax tier.
It always feels good though to invest in something local. Like there's a road that was recently built in my area, and I considered buying bonds in it. (I know the CUSIP and everything, but I decided to put my money elsewhere, into a Chicago Hospital bond for much higher profits). Without bondholders, those roads or hospitals would never be built... so you do good for your community and everything.
Alternatively, you can buy a mutual fund that focuses on municipal bonds. This adds diversity and simplicity, but costs a %-based fee each year. A good US Federal treasury-bond fund (like TLT) should have fees below 10 BPS (BPS == basis point. A percent-of-a-percent. 10BPS == 0.10%). Municipal bond funds are usually 20-BPS to 150BPS, depending on what you get.
First Strike +1/+1 and Indestructible.